Carrick Talks Money

Portfolio Makeover

The book is a surprisingly accessible read and totally persuasive in its argument that workers, unions, politicians and business need to collaborate on ways to help people better prepare financially for retirement. Most importantly, it offers pragmatic solutions that have worked to solve pension challenges in places such as New Brunswick and Rhode Island.

Here’s an edited transcript of a conversation I had about the book this week with Mr. Leech.

Why are pensions the “third rail” [a reference to the deadly electrical power source on subway tracks]?

When we asked people involved in pension reform, “Why have you let the system get into the shape it’s in,” they said this is an issue that politicians, labour leaders and even business would prefer not to touch because you’ll get zapped.

Zapped? How, exactly?

Tough decisions need to be made on tough issues, such as intergenerational fairness and people perhaps being required to save more.

What’s the matter with the pension system today?

Ground Zero is the wage earner at $30,000 per year up to $100,000 – this group is not adequately prepared for retirement and the CPP [Canada Pension Plan], GIS [Guaranteed Income Supplement] and Old Age Security [OAS] combination really isn’t sufficient to give them the funds required for them to live on. Another issue has been the foolhardy rush from defined benefit to defined contribution plans, which is very counterproductive and goes against the sustainability of retirement security. The third issue is that 60 per cent of Canadian workers are not part of a workplace pension plan.

(Note: A defined benefit plan pays out a pre-set amount of money based on factors like salary and years of service, and it’s the employer’s obligation to make up any shortfalls in the plan caused by weak investment returns; in a defined contribution plan, pension payments depend entirely on the returns achieved by plan members.)

You say in the book that “for many retirees, personal savings won’t be much help” in paying for retirement. Why are we doing such a bad job saving for ourselves?

It’s really a question of whether I consume today, or whether I save to consume tomorrow. The allure of that latest iPad is very intoxicating.

Can you outline the risk to taxpayers if retiree income falls short?

Right now, OAS and GIS represent about $36-billion annually, which is approximately the largest single expenditure of the federal government, and it’s already expected to triple in the next couple of decades. If in fact we have people who are not able to get by on their current retirement incomes, we’re just going to end up increasing OAS and GIS, and that comes right out of the taxpayer’s pocket.

There’s a sense of fatalism about the decline of defined benefit pension plans, as if they were too good to be true. But you raise a very cogent argument in favour of keeping DB plans – can you lay it out for us?

Defined benefit plans have been able to outperform from an investment perspective over defined contribution plans or RRSPs, and they’re far less expensive. Also, longevity risk [the risk of outliving your money] can be pooled in a defined benefit plan. If you’re in a defined contribution plan you must save enough money for yourself.

Many corporations see defined benefit pensions as an expensive obligation they would like to eliminate. How can you address their concerns?

We say very clearly that the stereotypical, old school DB plan really doesn’t cut it any more. We must turn to some sort of risk sharing plan, where some of the benefits are guaranteed but some are also contingent on the financial wherewithal of the plan. That takes a lot of the risk out for the sponsor.

If we were to move to a shared-risk model, would it apply to existing pension plan members or to new ones?

The way the current pension benefits acts are written, one cannot change the benefits that have already been earned. In the New Brunswick case, what they did to conform to that was to form a whole new genre of plan and have people convert to the plan. Indeed, the risk sharing there does apply to current pensioners. If the plan does not have the wherewithal to make an inflation increase this year, that applies to everybody, including those who have been retired for many years.

Governments don’t seem to want to do anything that would annoy retirees because they’re such a formidable voting bloc. Can retirees be brought on side?

I think people have to understand the fragility of the system and the fairness, or unfairness, of whether putting 100 per cent of the burden on the next generation is the right way to go.

In the book you say the three pension pillars in Canada are OAS and GIS, the CPP and a combination of personal savings and workplace pensions. On a scale of one to 10, where 10 is best, how would you rank the health of each pillar?

I’d give OAS and GIS very strong marks – 10 out of 10. I’d give the CPP a nine out of 10. I’d give the third pillar a failing grade – a four.

The book endorses the idea of an enhanced CPP to help make up the retirement savings shortfall. Why is the CPP option so attractive?

The CPP already exists, so we’re not setting up something that is new. Second, it’s universal and it’s large enough and has the scale to be able to invest across a diverse set of assets to maximize returns. It’s very cost-effective.

What do you hope will come out of writing this book?

We’re trying to make things simple to allow the ordinary person to enter into the debate and not be confused by actuaries, accountants or economists. This is a people issue and it needs to be dealt with on that level.

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